Case studies

Jessica

I’m keeping my options open to make sure I enjoy my retirement.

Jessica is 66 and has three children. She’s built up a defined contribution pension pot of £60,000 and receives her full State Pension. Her husband died several years ago, which left her mortgage-free, £25,000 of savings and final salary pension income of £7,000 per year.

What Jessica wants

I want to boost my income now to start enjoying my retirement, before I decide the best way to remain independent and not rely on my children as I get older.

Jessica's idea

The income I receive from my late husband’s final salary pension and my State Pension means I can afford to take just a small level of income for the next ten years from my pension pot before deciding what to do with the rest after that.

What Jessica does

Jessica takes one quarter of her pension pot fund as a tax-free cash sum of £15,000

She puts the rest into a fixed term annuity over 10 years

She’ll receive £2,525 a year, taxed at 20% for 10 years, with an amount of £25,000 at the end of the term (known as the maturity value)

She can then decide how to use that maturity value, depending on her needs at the time

As her other income puts her in the basic rate tax band, she pays £505 tax a year on the regular income from her fixed term annuity

What Jessica gets

Tax-free cash £15,000

Fixed term annuity £2,525a year, subject to tax

Maturity value £25,000after 10 years

See how we worked this out

State Pension age64

State Pension£8,767

Pension pot£60,000

Other income£7,000 a year

Other savings£25,000

Property value£155,000

Jessica's calculation

Personal allowance (0% tax)

Earnings from £0 to £12,500

Basic rate (20% tax)

Earnings from £12,501 to £50,000

State Pension

£8,767 a year

Final salary pension

£7,000 a year

Total regular income (subject to tax)

£15,767 a year

Fixed term annuity income (20% tax)

£2,525 a year

Fixed term annuity maturity value

£25,000 (after 10 years)

Important things to consider

The income from the fixed term annuity is fixed for the 10 years. As a result, the effect of inflation means the spending power of this income will be reduced over time

If the maturity value at the end of the term is taken as a lump sum, this will be taxable and any tax payable will be taken off before payment

If the maturity value is used to buy another retirement product, it won’t be subject to tax although any income generated from the new retirement product will be treated as taxable income

If she has opted to guarantee her income payments for the term of the plan, and she dies before it finishes, her children, as named beneficiaries, will continue to receive the remaining payments and will also receive the maturity value at the end of the term

Once a fixed term annuity is set up and the cancellation period has expired, she may not be able to cancel or change her options

The longer she lives, the further the £25,000 maturity value will have to stretch

Once Jessica has exhausted her pension pot, she'll be reliant on her savings, State Pension and her late husband’s final salary pension for income in retirement unless she has any other assets she can use to give her an income or is able to claim any state benefits

If Jessica needs extra money she could think about releasing equity from her property, for example with a lifetime mortgage. A lifetime mortgage is a loan secured against her property which could give her a tax-free lump sum. There may be cheaper ways to borrow money. Interest is charged on the loan amount plus any interest already added. The amount owed grows quickly and reduces the equity left in the property.

Better deals may be available so it’s important to shop around

Tax payable on any income will be taken off before it is paid out

This example is based on current law and tax rates. These may change in the future and income tax will depend on individual circumstances

If you live in Scotland or Wales you may have a different income tax rate or band

The State Pension amount shown here is the current maximum and is only an example. The amount you get depends on your National Insurance contributions’ record and your individual circumstances. You can get a State Pension forecast by visiting GOV.UK View - Check your State Pension